Opinions of contributing entrepreneurs are their own.
As a lifelong accountant, I have some surprising news for you: Your monthly financial statements aren’t very effective.
Of course they can help. It’s good to look back at the previous month and the year-to-date results so you can determine whether your business is profitable and also where there may be overspending. Don’t ignore your monthly financial statements. But take them with a grain of salt: they’re usually prepared well after the fact (for many of my clients, it’s weeks after the month is up). So while they serve as a good post-mortem review of results, they are not that useful for running a business in real time.
So what’s useful? I’ve found these three reports to be the core of my best clients’ managers who run profitable businesses. Why? Because they tell the manager what is going on right now and what is likely to happen in the near future.
Related: The 5 Most Important Accounting Reports for Your Small Business
The flash report
You may not have heard of this report because it is not a common name among accountants. But for my best clients, their “flash report” is an essential tool to keep a real-time pulse on the business.
The flash report is an aggregation of data from many different sources. It is usually produced 2-3 times a week and not necessarily compiled by a financial person, but by a good administrative person who has access to the necessary data. I have clients where the administrator manually creates this report (literally) on a piece of paper and leaves it on the owner’s desk. I have others who do it through a spreadsheet or through email. The report brings together numbers from different places that are critical to a company’s current operations.
These figures vary by industry, but for the most part they include current cash, receivables and payables. The report also shows year-to-date sales, backlogs, purchase orders, and open quotes. It shows year-to-date hours and overtime. Some of my clients like to see updated data on specific current jobs or product lines.
The most important thing about this report is benchmarking. Each current number has a corresponding number from the previous period. For example, if cash is $500, what was the cash at the end of last year? Or if current year sales are $10,000, what were the same sales at this point last year? Are we ahead or behind? You need to compare your current numbers to a similar time period to put things in context.
The pipeline report
Where the flash report pulls numbers from a variety of sources, the pipeline report needs to pull numbers from your customer relationship management (CRM) system – an application every company should have. When you use your CRM system properly, you keep track of quotes and opportunities, as well as tasks and emails related to them.
My best clients use this data weekly and view a pipeline report. The pipeline report lists all open opportunities, usually labeled “hot,” “warm,” and “cold,” which are defined internally. It shows the dollar value of the opportunity, the estimated close date, and the “weight” or probability of it becoming a sale. It also shows who is working on the opportunity and what historical and future tasks need to be done to complete the opportunity.
When used properly, the pipeline report is a tool to manage the sales team and see who is doing what and how effectively. This report is a sales forecast and serves as a crucial tool for knowing whether growth or contraction is ahead. Compiling this report every week will not only help you direct your underperforming sales reps to more productive activities, but you’ll also have a finger in the bloodstream of your business: your projected revenue.
There are other great reports you can run from your CRM system, but that’s a topic for another day. Relying on the pipeline report will not only help you increase and manage your company’s projected revenues, but also increase the utilization of your CRM system.
The rolling cash forecast report
If you have a great pipeline report, good for you – you forecast your revenue. But forecasting revenue alone is not enough. My best clients predict their cash flow. Why? Because successful people always look ahead. They don’t like surprises. They want to know what’s coming so they can make decisions ahead of time and better manage the future. Sales are important, but in the end it’s all about money. Do you know how much your money will be in 90 days? Probably not. But you should. And to know this, you must have a rolling cash forecast report.
Compiling this report is not that difficult. Here’s how:
First, estimate your overhead costs for the next 90 days. You know this: it’s your payroll, utilities, rent, internet: all the recurring costs you already pay.
Then estimate your typical margin on a sale, taking into account the direct materials and labor required. I realize this can vary based on many factors from product line to time of year. But this isn’t science – it’s just an estimate. So come up with a reasonable number.
Assuming you produce a reliable pipeline report, you have your sales forecast for the next 90 days. There are sales that are not in this report because they have already been closed and are considered open orders. Add this. Then talk to your sales team to further refine this 90-day sales forecast.
Now take your estimated sales, multiply the estimated margin, and subtract your estimated overhead. You are almost there!
Think about any anomalies in the next 90 days — an estimated tax payment, a large vendor check due, etc. — and work that out. receive your final money within 90 days. voila! You have now made a rolling cash forecast.
Create a rolling cash forecast each month. It will be hard at first, but easier after you get the hang of it. Trust me when I tell you it will change your life. You will no longer run your business in the dark. You get a better picture of the future and can therefore make better decisions.
Basically, there are many reports that are great for a business. But most of them involve analyzing the past. My best clients do this. But the reports that really help them focus on the present and the future are the ones I mentioned above. Start producing these reports and you will find yourself leading a more profitable, sustainable organization.